JLR is a big problem for Tata Motors at this juncture, Mahantesh Sabarad, Head, Retail Research, SBI Cap Securities told in an interview:
Edited Excerpts:
ET Now: What is your outlook for 2019? One big trigger for example is going to be elections. The trade war cease fire where is that cease fire, look what the kind of headlines that we are getting today from China. So I would imagine volatility will still be the name of the game in 2019. But the big question is that could we enter a bear market that has been some of the fear if you look at what is happening globally?
Mahantesh Sabarad: On the contrary I think of the two events that you have mentioned, I would rather pick the other event which is the US Fed interest rate policies. We have had four rate hikes in 2018 and Fed has already indicated that they will have only just two more, which is a little more dovish in 2019 relative to 2018, and the Fed is also talking about how recovery is happening not just in the US economy but also globally.
They do highlight risks that exist, particularly the trade tensions, but nevertheless, what we conclude from this assessment is that the dovish stance of Fed will make the markets actually more better in 2019 relative to 2018. So we should have a good year ahead.
Also read: Tata-owned JLR to cut 5000 jobs in 2019: Report
ET Now: When we just look at what is happening in terms of outlook 2019. Chairman of Tata Group is talking about cautiousness about things going into 2019. You think investors are already cautious going into the next year?
Mahantesh Sabarad: The perspective from where Tata Sons chairman is coming from, he is essentially alluding to the fact that global conditions are not so conducive for their group of companies. As you are aware, most of the Tata Group companies now have dominant revenues or sales coming from global streams be it JLR, be it TCS or Tata Steel. So therefore the statement of Tata Sons chairman relates to the global developments.
As far as we are concerned in India, we should be having relatively a better trade for markets ahead. Yes there are certain volatile events that will occur, but those volatile events typically occur for two or three days thereabout and market sort of forgets them.
So between the global outlook that is a challenge for Tata Group companies versus the Indian equity market outlook, I think the Indian equity market will have far better days than global equity markets.
Also read: Tata Motors assures UK PM May of JLR commitment: Report
ET Now: While you talk about the global risks that exist for the Tata conglomerate. The biggest worry perhaps would you agree with them is Tata Motors, you have got Brexit, look what is happening in China, the import duty, the slowdown in Jaguar Land Rover and domestic sales of Tata Motors have not been able to be in the fast lane. So that is as far as Tata Motors go, but we are also talking at a time when auto sales generally have slowed down for the entire market, are you worried about the sector in particular?
Mahantesh Sabarad: Yes, I will be very worried about the sector per se as far as the Indian market go. So automobile sales are indeed slowing down and the outlook ahead appears that they may not be able to post any better sales growth than what they would have done this year.
That is simply because you also have structural events coming along the way for the automobile industry, including the emission control norms and things related to that. As far as JLR is concerned, the concerns are far more wider, not only are they facing a sales slowdown they are up against huge amount of competition. Again there in structurally a lot of things are changing, the world automobile market is getting slowly electrified, which means you have more and more EV plays coming in and that is becoming a bit of a challenge for JLR.
And the other challenge is on the financial side or on the balance sheet side for JLR you will have a company, which was so far cash rich becoming thoroughly moving into the debt side so you will JLR getting indebted more and more. So yes, JLR is a worry for Tata Motors and the domestic market may not necessarily help it provide a hedge against the JLR’s poor performance.
ET Now: Just when we talk about the auto pack, what is your view as far as Tata Motors is concerned. It has been one of the big underperformers this year in terms of stock price. What essentially do you believe how investors should approach Tata Motors?
Mahantesh Sabarad: See we have been generally advising people to avoid Tata Motors. This has been our standard advice throughout the year of 2018 and I think that would still remain the same when we go into 2019 for reasons I just enumerated. JLR is a big problem for Tata Motors at this juncture.
They have acknowledged the problem and therefore they are working towards cost reduction and so and so forth. They have already guided for a lower capex if you recall after the last results. So yes, the problem is there and we are telling our investors to stay away from Tata Motors.